AITX Analysis – Q3 10Q, My Thoughts

Hello readers! I’m very happy to be back writing articles after my bout with COVID. I’m still a bit sick, so hopefully this article is a somewhat coherent. But having done a read through the 10Q, I wanted to get down some of my “good and bad” from the reading.

Also, I did a predictions article here, and I got a solid F on that one as you’ll see 😊. I may do one shorter article with a comparison, but the grade was not good!

One disclaimer before I begin. As of writing and publishing this on the evening of Jan. 19th, AITX has not issued a press release discussing the results. So many of the points I brought up could be addressed by the time you read this. My article is based entirely on the 10Q in isolation.

Now let’s get started…

The Good

Cash

AITX’s cash balance on hand came in at a healthy 4.1m, which is higher than the approximate 3.0m I was anticipating. Not included there was about another million in cash that was booked as a receivable that was cleared in December, and then another million from GHS which was near the end of December. That gives the company a nice cushion and some time to spend building out the team even more.

Inventory Levels

Device parts inventory went up around 800k to about 1.3m. What does this mean? It means that AITX is building up a large amount of production materials, product inventory, etc. likely in anticipation for higher sales figures down the road. I’ll get to this later, but this also is partially related to (what I think are) backlogs from sales that were already PR’d.

Remember, AITX can’t recognize the revenue if the units are finished and deployed. So, if there’s a backlog, all of the parts, materials, etc. sit on your balance sheet.

Revenue

(I’ll get to revenue vs. guidance/expectations later) Total revenue was 373k for the quarter vs. 141k at Q2. This consisted of 165k in recurring revenue vs. 123k at Q2, with the rest being non-recurring revenue vs. 18k at Q2. So, quarter over quarter we’re seeing total revenue more than double which is cool progress.

However, as you know, we really should be paying attention to recurring revenue. That growth rate was much lower at 34%. 34% is nice growth, but I think everyone was expecting better there. But still, growth is growth!

R&D

R&D spend is up 300k from about 700k in the prior quarter. That is a huge increase quarter over quarter which really goes to show just how much money AITX is pumping into product development and new technology. The idea is that long-term this could create some pretty serious value, but of course not guaranteed! Either way, the spend and the effort is clearly there.

The Bad

Let me just re-iterate because I know a lot of my readers are big fans of AITX… I would be remiss if I didn’t bring up several points that were negative points for me from the 10Q. I currently have a long position, so writing this isn’t exactly going to help my case 😊. But I want my readers to know that I am always willing to point out the negatives. I’m not just a run of the mill pumper.

Feel free to disagree as well, I’d love to hear it! Either way, I’ll try to present a bullish case and bearish case for each of these.

Q3 Revenue Guidance vs. Actual

I won’t rehash this too much, but just read this press release, my articles predictions, and then the revenue figures posted in the 10Q. People were clearly expecting higher revenue for the quarter. When you read that press release, it makes it seem like we would end up closer to 800k, whereas we ended up at less than half of it. That was obviously very disappointing for me when I first opened up the 10Q.

Is all lost? Not necessarily. What most likely occurred was there were unanticipated delays in deployments that pushed the revenue out into Q4. Remember, they can’t recognize the revenue until it’s deployed. So, potentially that “missing” revenue is really just going to be picked up next quarter and still within the same fiscal year. The absolute worst case is that it was sales that fell through, but I kind of doubt it.

Assuming it is a delay in deployments, why is this bad then? First, the company’s missing out on revenue for a month or maybe longer which is far from ideal. Two, it’s generally not a good sign when a company is not meeting its guidance, which in my estimation was due to deployment delays. Whether it’s the company’s fault or not, to me it’s not a bullish sign. However, it’s not an irreversible sign. This could just be a blip on the radar.

FYE 2022 Guidance

Here’s more of a perplexing one to me, and I’m hoping it’s just because I’m misreading. When speaking about revenue forecasts for FYE 2022, AITX has stated the following:

• FYE 2021 10k: “The Company currently projects that next fiscal year’s revenues will be between 5 and 15 times greater than this fiscal year’s revenues.”
• FYE 2022 Q1 10Q: “The Company currently projects that 2022 fiscal year’s revenues will be between 5 and 15 times greater than the 2021 fiscal year’s revenues.”
• FYE 2022 Q2 10Q: “The Company currently projects that 2022 fiscal year’s revenues will be between 5 and 15 times greater than the 2021 fiscal year’s revenues.”

Seems pretty consistent there. Here’s what we got in the Q3 10Q just released:

“The Company is on track to achieve it’s 2022 fiscal year revenue projections of approximately 4 to 5 times greater than 2021 fiscal year’s revenues. The company again projects 2023 fiscal year revenues to achieve similar growth.

If I’m misunderstanding this, someone please let me know. But the target was 5-15x FYE 2021 revenue, not 4-5x. Maybe the wording didn’t come across right here, but it seems like AITX just lowered expectations for the fiscal year. Or at the very least signaled that they’re thinking we land at the very bottom of the 5-15x revenue figure. It almost feels like retroactively changing their target, it reads like the target was always 4-5x when it clearly wasn’t.

For context, through 9 months AITX has had around 1m in revenue. Four times FYE 2021 revenue of 360k is 1.44m. Five times that figure is 1.8m. That means Q4 revenue is anticipated to be 440k to 800k using those amounts. So still growth from Q3, but we’re at the very bottom end of expectations.

All of that being said, 5x growth for the year, for example, would be very nice compounding growth. A few years of that level of growth would see the company go places. However, the messaging here is confusing to me and I don’t understand its “retroactive-ness” (if that’s a word!). Couldn’t they have just written: “the goal was 5-15x, looks like we’re going to 4-5x which is likely below expectations. However, we’re still confident long-term.” Something like that?

Executive Compensation

Stocktwits is already having a field day with this, so I’d be remiss if I didn’t bring it up. The CEO earned more Series G preferred shares as part of his equity compensation plan approved by the company (himself as the majority vote holder). As of the end of Q3 he earned 2m in Series G preferred shares for the following milestones:

• #3 – Sales in any quarter exceed those of FYE 2021
• #4 – 150 devices deployed
• #5 – YTD sales in FYE 2022 exceed 1m
• #8 – RAD 3.0 launched into marketplace by Nov. 30^th, 2021

How the Series G works is he gets these preferred shares instead of cash or straight common stock. The company (the CEO himself for all intents and purposes) can then decide to purchase them from him for $1,000 cash per share. If the company doesn’t buy them for a while, it still retains its value.

What happened is the CEO had earned about 2m in the Series G. He then decided to have the company purchase 1.5m from him in cash. So basically, he cashed in on a 1.5m accrued bonus.

Now, let me give two sides of this coin…

Bearish:

On the negative side, that is a lot of cash that the company could have used to reinvest in the business. More people, more developers, more equipment, whatever. The Series G doesn’t lose value unless the company goes under, so him cashing out could be seen as a bearish sentiment.

Also, from an optics perspective, the company has apparently raised 9.4m in cash from the S-3 so far. 1.5m is a hefty chunk of the money raised from this round of dilution. And this is a company that’s not anywhere close to profitable, nor does it have unlimited cash.

While it may have been reinvested in the company, it was only reinvested into one person, which may or may not have been the most efficient use of that money for shareholders. I’ll leave that up to the reader.

Finally, every time there is dilution, all of the F Series shareholders actually receive more common shares. The F Series is anti-dilutive. Furthermore, the F Series owners always effectively own around 70%+ of the common equity. Say there’s 1000 shares outstanding. Because of the F Series (say there’s one holder), the F Series holder really effectively owns 3450 (100*3.45). If the company issues 500 more shares to bring it to 1500 shares total, the F Series holder now effectively owns 5175.

So, essentially the F Series owner is never diluted when new shares are issued.

Back to this case. AITX diluted the non-F Series shareholders to receive cash. AITX then paid the CEO, who already owns more than 90% of the F Series, out of this bucket of cash. So, the CEO was not directly diluted from the issuance and then used 1.5m out of around 9.4m to then pay himself.

Bullish:

First, this compensation plan has been in place for like 9 months. So, it’s no mystery this thing exists. If you didn’t know that the CEO could do that, it’s your fault and you should have built that executive expense into your models. Period. This should not have been a surprise.

Second, on the F Series point, the F Series has existed for years. So, once again, it should not be a surprise to any of you how it works and the anti-dilutive dynamic. I wrote a very nice article on it, didn’t you read it?!

Third, it very well could have been an effective way to reinvest into the company to pay him 1.5m. The CEO is probably the single most important person at the company, especially in this case. The majority of the CEO’s worth was tied up in the F Series all of this time which is effectively an illiquid instrument until late 2023.

The guy still has bills, kids, a wife, a life! Do you want your CEO totally strapped to an illiquid piece of paper for that long? Some may call it bullish to have a CEO totally equity based and locked in for years, but it isn’t necessarily. It’s usually most effective for it to be a mixture of cash and equity.

My take?

I’m hesitant to touch this one yet because, frankly, I’m not sure how I feel. That being said, if we don’t see some significant nearer term revenue growth, that 1.5m could have been desperately needed in the business. The G Series could’ve just sat there for another 6-12 months, etc. and then been cashed out once the company was on more stable footing, perhaps?

But at the end of the day, it’s his money, we knew it was there, end of story. He can do what he wants with it, and you as the investor need to decide if that’s okay with you. If not, it’s time to divest. If it is okay with you, then no problem!

Accounts Receivable (“AR”) Allowance

I’ll keep this one really short, but from Q2 to Q3 AITX raised their allowance for doubtful accounts from 26k to 131k. This means AITX thinks they won’t collect on 131k of revenue they’ve already billed. YTD revenue was around 1m, so this 131k represents about 13% of revenue already recognized that AITX thinks it will never collect on. That number’s starting to creep a little high, will monitor going forward.

Wrap Up

All in all, I thought the Q left a bit to be desired vs. where I thought they’d be at Q3. There were some bright points, but I think in general the negatives tended to weigh on me more than the positives. Maybe I need more time to digest, maybe it’s the COVID, who knows! I haven’t written AITX off by any means, but this was definitely not the ideal 10Q in my mind.

HOWEVER, as to not discourage my bullish readers, remember again that this all in the PAST. This is a snapshot of the business from 9/1/2021 to 11/30/2021. A lot has changed since then and a lot more will still change. So even if this Q was not what you were expecting, it doesn’t necessarily mean Q4 is going to be a dud. We all know there’s a lot of sales to be made, devices to deploy, and potentially more exciting stuff.

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DISCLAIMER – I CURRENTLY HOLD A LONG POSITION IN $AITX. THIS ARTICLE IS NOT FINANCIAL ADVICE AND IS INTENDED ONLY FOR EDUCATIONAL PURPOSES. I AM NOT A FINANCIAL ADVISOR. AT THE TIME OF WRITING THIS ARTICLE, PERSONS AFFILIATED WITH THE COMPANY ANALYZED ABOVE MAY BE PROVIDING MONETARY COMPENSATION AS MONTHLY PATRONS THROUGH MY PATREON. THIS COMPENSATION IS NOT PROVIDED IN RETURN FOR ANY SERVICE, WRITING ABOUT A PARTICULAR TOPIC, AND/OR FAVORABLE OR UNFAVORABLE OPINIONS. MY PATREON SUPPORTERS HAVE NO INFLUENCE ON THE CONTENT OF MY ARTICLES.